Financial institutions must ensure that the customer records they use to make decisions are correct. There are often several separate entities involved in making financial decisions. In an example scenario, one company might manage the customer's account; another might make investment decisions; and a third will actually buy and sell the securities on behalf of the investor. When multiple parties are involved, one party is designated as custodian of the information. The custodian is said to be keeping the “book of record.” This custodian company is the source of the truth about what securities the investor holds. Often this custodian company is a sponsor firm with which investors have accounts.
Each other company who needs to make decisions based on the customer's holdings needs to be sure that they have accurate information. They must periodically compare the information they have with the custodian's information to identify and correct any differences. This process is called reconciliation and is a key challenge facing financial institutions. The company who is performing the reconciliation can be referred to as the shadow company because they are keeping a shadow copy of the information that the custodian makes available. The information from the custodian can be provided in a variety of formats, including for example web pages, text files, spreadsheet files, fax printouts, on screen through a legacy terminal system, and the like. This information is often compared manually and any differences that are identified must be manually entered into the shadow accounting system.
Reconciliation must be done quickly and accurately. The information from the custodian systems is usually available in the early hours of the morning and must be reconciled before any decisions or trades can be made. This process requires identification of any differences, correction of any problems, and tracking of the process so that the status of individual accounts is known. This is a costly and error prone process for many institutions today.
There are two types of information that can be compared during reconciliation: positions and transactions. Positions (also called holdings) are simply the list of securities that each account holds; transactions capture all activity that occurs. If the proper set of positions are available at a point in time and all of the transactions are applied that the custodian has applied, then the positions should match the custodian's positions. When performing reconciliation, many companies perform only position reconciliation to ensure that they have the same holdings as the custodian. They do this because the cost in time and dollars of doing the transaction reconciliation is too great.
What would therefore be desirable would be a system for performing reconciliation that streamlines the reconciliation process. It would be desirable for a system for performing reconciliation to allow the user to define rules to ensure that the differences detected (also called breaks) and presented to the user are the most important breaks. It would be further desirable for a system for performing reconciliation to allow a manager to specify that certain types of transaction differences should be automatically corrected. It would be further desirable for a system for performing reconciliation to allow the reconciliation user to accept values from the custodian system automatically into the shadow system. It would be further desirable for a system for performing reconciliation to enable the matching of outstanding trade orders to unmatched transactions in the reconciliation system. It would be further desirable for a system for performing reconciliation to enable comparison of backdated custodian transactions. It would be further desirable for a system for performing reconciliation to enable proper matching of positions and transactions that have not yet settled.
The system for performing reconciliation described and claimed herein may perform one or more of the tasks set forth above.